Zoomlion’s net profit in 3Q19 came in at RMB904mn, surging 106% YoY, within the range of RMB850-950mn disclosed in the positive profit alert in mid-Oct. Going forward, rising infrastructure spending, resilient growth of property area under construction, replacement of national emission standard (NES) III trucks, and market share gain on tower crane will all serve as a share price catalyst. We maintain our TP of RMB7.28 (based on 1.4x 2019E P/B, on the back of 11.6%-13.4% ROE in 2019E-21E), similar to the level in 2013 (11.8%). Reiterate BUY.
- Key highlights of 3Q19 results. The net profit growth of 106% in 3Q19 was mainly driven by: (1) a 50% YoY increase in revenue to RMB9.5bn; (2) 1.2ppt YoY expansion in gross margin to 29.4%; and (3) reduction of selling expense ratio and administrative expense ratio of 1.2ppt and 0.6ppt, respectively, thanks to the operating leverage. In 9M19, net profit surged 167% YoY to RMB3.48bn, representing 76% of our full year estimates. Operating cash inflow increased 62% YoY to RMB4.96bn, much higher than the net profit, suggesting high earnings quality.
- Further growth driven by a couple of positive factors. Demand for tower crane and concrete machinery are correlated with the growth of property area under construction (8% YoY growth in Aug, highest growth rate over the past four years). Besides, Zoomlion is set to benefit from the structural rising demand for large-size tower cranes, as a result of the increasing application of pre-cast concrete construction. Furthermore, the elimination of NES III trucks will continue to lend strong support to the demand for truck crane and concrete trucks over the coming two years.
- Risk factors: (1) Unexpected weakness on property construction activities; (2) Slow recovery of infrastructure spending; (3) High earnings volatility.
